Relative Strength Index (RSI): Formula, Signals, and What Tests Reveal

The Relative Strength Index (RSI) compares recent price gains with recent price losses and expresses their balance on a scale from 0 to 100. Traders commonly use a 14-period RSI, with readings above 70 called overbought and readings below 30 called oversold.

Those labels describe momentum. Buying while RSI is below 30 and buying after it recovers above 30 ask for different events. Across 313,632 valid historical configuration evaluations, we examined how RSI settings and trading rules interact. We will start with the calculation, then explore the behavior behind the familiar signals.

How RSI is calculated

RSI uses an average of upward price changes and an average of downward price changes, with losses expressed as positive amounts:

RS = average gain ÷ average loss
RSI = 100 − 100 ÷ (1 + RS)

Average gain = 2, average loss = 1
RS = 2
RSI ≈ 66.7

The usual calculation uses Wilder’s smoothing. After the initial averages, each update keeps part of the previous average and adds the latest change. For a 14-period RSI:

New average gain = (13 × previous average gain + latest gain) ÷ 14
New average loss = (13 × previous average loss + latest loss) ÷ 14

An upward close contributes a gain and a zero loss; a downward close contributes a loss and a zero gain. The averages retain some influence from older changes, so RSI 14 has a different kind of memory from a simple average containing exactly 14 observations. TradingView’s RSI guide covers the indicator and its calculation.

The period follows the chart. RSI 14 on a daily chart updates from daily closes; on a two-hour chart, it updates from two-hour closes. The familiar number 14 therefore describes different market time on different charts.

Why a flat price does not automatically cool RSI

Suppose price closes unchanged. The latest gain and loss are both zero. In the calculation above, both existing averages are multiplied by 13/14.

Their ratio stays the same, so RSI stays the same. With established, nonzero averages, a flat candle does not pull the oscillator toward 50 merely because time has passed.

This helps explain why a high reading can persist. RSI measures the balance of gains and losses under its smoothing rule. A move back down through 70 requires that balance to change.

How traders read RSI signals

Several familiar interpretations appear in Fidelity’s RSI guide:

• Overbought and oversold: 70 and 30 mark customary momentum extremes. A strong trend can keep RSI near an extreme for an extended period.
• The midpoint: above 50, the smoothed gains exceed the smoothed losses; below 50, losses exceed gains. This supplies trend context.
• Recovery crossings: a rule can wait for RSI to cross back above an oversold level before buying, or back below an overbought level before selling. Schwab’s explanation discusses waiting for this return crossing.
• Divergence: price can make a higher high while RSI makes a lower high, or a lower low while RSI makes a higher low. Traders use this difference as a possible warning about momentum. Our mechanical tests below focus on levels and crossings; they do not test divergence.

“RSI is below 30” describes a state that can last several candles. “RSI has crossed back above 30” describes a transition after that state. The distinction matters when turning a chart interpretation into an entry or exit rule.

Overbought can persist while price advances

The price panel appears above RSI 14. Move the shared inspection slider to compare the same candle in both panels.

RSI remained above 70 for 20 consecutive closes in the highlighted stretch, while price ended higher. The high reading described sustained upward momentum throughout that episode.

We selected a long stretch above 70 to make persistence visible. It illustrates how a high reading can last; it does not estimate how long the next one will continue. The chart shows calculated indicator values without trade markers. Exact source and selection details are folded below.

Waiting for a crossing changes timing

A common exit sells when RSI rises above 70. Another waits until RSI crosses back below 70. The second rule allows an overbought stretch to continue, but that extra time can help or hurt.

We compared these exits after the same recovery entry: RSI crosses above the lower level and remains at or below the upper level. Every other setting stays fixed. One execution means one buy or one sell.

In one historical dataset, 3,651 of 3,701 matched pairs recorded the same execution count when both rules had at least one buy and one sell. Their returns still differed. The same broad pattern appeared across all eight historical datasets: at least 97% of these active pairs had matching counts. Changing when a position closes can alter its outcome without reducing the number of transactions.

Waiting for the downward crossing improved some historical results and worsened others. Confirmation changes the timing of a trade; it did not supply a consistent advantage across the tested comparisons.

Read the lookback together with the levels

Longer RSI periods smooth changes more heavily. Whether that produces a quiet trading rule also depends on how far its thresholds sit from 50.

For a rule that buys below the lower level and sells above the upper level, one historical sample produced 91 executions with 30/70 levels and 275 with 40/60, using RSI 14 in both cases. The lookback stayed the same; moving the decision levels closer to 50 changed how often the rule could act.

The chart displays lengths 7–100 for legibility; the complete tested grid runs from 2 to 100. Each point holds the entry and exit levels fixed and changes RSI length. A longer lookback can make a distant threshold rare; bringing the levels toward the middle changes the opportunity set again. These observations do not imply that every one-period increase must reduce activity. Compare the two threshold choices at the same lookback; the only difference between them is the entry and exit levels.

For other ways to measure momentum, compare the Stochastic Oscillator and CCI. Related reading: simple moving averages, MACD, and Bollinger Bands.